5-920013
Franklyn S. Gillman
19(1) (613) 957-8953
June 16, 1992
Dear Sirs:
Re: Partial disposition of a Partnership Interest
This is in reply to your letter of December 30, 1991 wherein you requested Revenue Canada-Taxation's (the "Department") opinion on how the Income Tax Act treats a partial disposition of a partnership interest. You presented us with the following illustrative set of facts:
A partner 24(1) owns a 24(1) interest in the partnership with an adjusted cost base of $24(1). The partner sells a part of his interest in the partnership, to a new partner for proceeds which result in him realizing a capital gain. It will be assumed that the sale is on account of capital and not income and that the partner does not qualify for any life time capital gain exemption.
You stated that the area which you required clarification was as follows:
The issue, in the above hypothetical example, is whether the partner recognizes the resulting capital gain when he sells the partnership interest or whether the capital gain is recognized only when he sells whatever remaining portion of the partnership interest he still holds.
Some of your colleagues hold the view that the capital gain should be recognized on a pro rata basis on the initial sale while others hold the view that the capital gain would only be recognized when all of the remaining partnership interest is sold.
If the latter is the case, does this mean that a partner can defer an accumulated capital gain by retaining a nominal partnership interest, e.g. one percent (1%), and the accumulated capital gain will only be recognized in the hand of the partner's estate assuming he retains the nominal partnership interest until death?
It appears from a review of the above mentioned transaction you have enunciated that it may properly be the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R dated September 28, 1990. As expressed at paragraph 6 in the Information Circular, the Department will not express opinions on definite transactions that are being proposed other than by way of an advance income tax ruling, nor will the Department provide rulings on completed transactions.
While we are unable to provide confirmation of the tax effect with regards to a situation such as that described, we offer the following general comments for your assistance.
Where an existing partner in an on going partnership sells a portion of his partnership interest to a third party, a capital disposition has occurred of a partial interest. The Department's view is that two separate entities are created prior to a sale when a partial interest in a partnership is disposed of. Each partnership entity created from this disjunction would have an adjusted cost base calculated in accordance with the proportionate partnership interest it represented.
We trust that our comments have been of assistance.
Yours truly,
for DirectorManufacturing Industries, Partnerships and Trusts DivisionRulings Directorate